2.48%: The
10-year Treasury yield started the year at 3.03%. At the time,
Wall Street's interest rate strategists were convinced that the
yield would
climb to around 3.4% by the end of the year. So, what
happened?

"The recent strength in Treasuries that’s been impervious to
incoming economic data is probably to a significant extent a
result of positioning, but it seems to be increasingly spooking
investors in other markets worried that there’s an underlying
message being sent of the economy being in much worse shape
than the economic data are indicating," explained Morgan
Stanley's Ted Wieseman. Stifel Nicolaus' Dave Lutz has been
warning about positioning for a while, specifically
pointing out that short positions on 10-year Treasury futures
contracts were at a four-year high. Cumberland Advisors' David
Kotok had a nice writeup this weekend on why its about
low growth and low inflation.

One of the few people to predict the yield would fall to 2.5%
was DoubleLine Funds' Jeffrey Gundlach. Now that we're
there, here's what he thinks: "If we go down [more] on Treasury
yields, we will see one of the biggest short-covering scrambles
of all time ... If for some reason someone has to cover these
shorts, you could actually see the low yields of 2012 get taken
out."

Economic Calendar

Federal Reserve's
FOMC Minutes (Wed): The Fed will publish the minutes
from its April 29-30 FOMC meeting at 2 p.m. ET. From Credit
Suisse: "About the only aspect of the April 30 FOMC policy
statement that could be called a surprise was the relatively
upbeat assessment of the economy that came on the heels of that
morning’s disappointing +0.1% Q1 GDP print (although it is
worth noting that growth did improve within the quarter) ...
The minutes – to be released on Wednesday – may contain some
points of greater interest, however, including any details of
the April 29 Board Meeting that coincided with the beginning of
the two-day FOMC meeting, at which the topic of discussion was
'Medium-Term Monetary Policy Issues.' We will be looking for
discussion specifically relating to the exit strategy, and in
particular plans for additional testing of the fixed-rate
reverse repo facility ... Also, given Fed Chair Yellen’s
subsequent public comments about the risks associated with
sluggishness in the housing market, any discussion in the
minutes about the housing sector would be of interest."

Initial Jobless
Claims (Thurs): Economists estimate jobless claims
climbed to 310,000 from 297,000 a week ago. "Initial jobless
claims probably were little changed, after a sudden drop," said
Citi's Peter D'Antonio. "First filings have been extremely
volatile over the last two months, bouncing around in a wide
50,000 range. Moreover, claims have averaged about 320,000 in
each of the last three months, suggesting little change in the
underlying trend. Conversely, the story for continuing claims
has been unambiguously better."

Markit US
Manufacturing PMI (Thurs): Economists estimate the
preliminary read on this manufacturing index will be 55.5, up
from 55.4 in April. "So far in May, regional Fed manufacturing
surveys have been consistent with a healthy trend in
manufacturing output growth," said UBS' Kevin Cummins.

Existing Home Sales
(Thurs): Economists estimate sales climbed 2.0% to an
annualized rate of 4.68 million. "Existing home sales have
slumped since August of last year due to a low inventory of
homes, less investor buying, and recently, the adverse weather
conditions," said Nomura economists. "The pending home sales
index, which tends to lead existing sales by one to two months,
increased in March, for the first time in nine months, and
suggests that the existing homes market might be stabilizing."

Kansas City Fed
Manufacturing Activity (Thurs): Economists estimate this
regional activity index was unchanged at 7 in May. "The Markit
PMI and the manufacturing ISM suggest a strong trend in factory
output," said UBS' Cummins. "As mentioned, the NY and
Philadelphia Fed surveys already reported for May were solid."

New Home Sales
(Fri): Economists estimate the pace of sales jumped 9.4%
to 420,000 in April. "Lagged effects from the weather and
ongoing supply and affordability issues likely prompted the
sharp drop in new home sales in March," said Nomura economists.
"Mortgage applications for home purchases increased in April,
but the current sales of single family homes subindex within
the survey declined in April, suggesting that there probably
was little improvement in new home sales in April."

"One... item confusing investors is the strength of bond prices
this year even as so many believe equities would be the better
performers," said Tobias Levkovich, Citi Chief U.S. Equity
Strategist. He noted that falling rates were "unexpected with
various theories running around, ranging from foreign buyers
trying to push down their own currencies to drive exports for
domestic economic growth reasons to banks covering short
positions given tighter risk controls amidst greater regulatory
oversight. Indeed, some think that the regulatory environment has
led to low inventories that exacerbate market moves in any
direction. We have heard that strong stock price gains last year
have forced pension funds to rebalance their portfolios from
equities to bonds as equity holdings rose to uncomfortably higher
levels due to last year’s index value appreciation. And, safe
haven arguments have evolved as well to explain Treasury buying
due to the Ukraine and other regional trouble spots."

Levkovich pointed out that while the outperformance of bonds
relative to stocks may seem odd, it's not unprecedented.

"In any event, stock price relative gains versus Treasuries had
been quite strong versus history (see Figure 6) and some backup
is not all that shocking," he said. "Moreover, with no
indications of inflation expectations shifting, one should not
worry that much about a big imminent spike in interest rates."